Textbook Answers As

answers to selected questions in the textbook
AS Unit 1 Introduction to Financial Accounting 1 2 3 4 5 What is financial accounting? Double-entry book-keeping: first principles Double-entry book-keeping: further transactions Business documents Balancing accounts the trial balance Division of the ledger the use of subsidiary books The main cash book Bank reconciliation statements Introduction to final accounts The general journal and correction of errors Control accounts Adjustments to final accounts 1 1 3 5 7 9 11 12 14 15 18 19
AS Accounting for AQA

second edition TUTOR SUPPORT MATERIAL: ANSWERS TO SELECTED QUESTIONS
6 7 8 9 10 11 12
AS Unit 2 Financial and Management Accounting 13 14 15 Osborne Books Limited 2010 16 17 18 Published by Osborne Books Limited Tel 01905 748071 Email books@osbornebooks.co.uk www.osbornebooks.co.uk 19 20 Budgeting and budgetary control The impact of computer technology in accounting 34 36 Business organisations Accounting concepts and stock valuation Further aspects of final accounts Preparing sole trader final accounts Financial statements of limited companies Ratio analysis 21 22 23 25 28 31
All answers are the responsibility of the publisher.
CHAPTER 1 What is financial accounting? 1.2 Purposes of accounting: To quantify items such as sales, expenses and profit 1. To present the accounts in a meaningful way so as to measure the success of the business 2. 3. To provide information to the owner of the business and to other stakeholders documents processing of source documents relating to accounting transactions initial recording of transactions recording accounting transactions in subsidiary books (or books of prime entry) double-entry accounts system transfer from subsidiary books into the double-entry book-keeping system of accounts in the ledger trial balance extraction of figures from all the double-entry accounts to check their accuracy final accounts production of a trading and profit and loss account and a balance sheet
1.7
asset of bank increases by 8,000 capital increases by 8,000 asset 8,000 liability 0 = capital 8,000 asset of computer increases by 4,000 asset of bank decreases by 4,000 asset 8,000 liability 0 = capital 8,000 asset of bank increases by 3,000 liability of loan increases by 3,000 asset 11,000 liability 3,000 = capital 8,000 asset of van increases by 6,000 asset of bank decreases by 6,000 asset 11,000 liability 3,000 = capital 8,000
1.3
CHAPTER 2 Double-entry book-keeping: first principles
Information from the accounting system includes: 1.4 purchases of goods for resale to date turnover (cash and credit sales) to date overheads and expenses to date assets owned liabilities owed profit during a particular period
2.1
Dr 20-1
Capital Account 20-1 1 Feb Bank
Cr 7,500
debtors total amount owed to the business, and individual debtors creditors total amount owed by the business, and individual creditors
Dr 20-1 6 Feb Bank
Computer Account 2,000 20-1
Cr
Other stakeholders any four from providers of finance, eg the bank manager if the business wants to borrow from the bank suppliers, who wish to assess the likelihood of receiving payment from the business customers, who wish to ensure that the business has the financial strength to continue selling the goods and services that they buy employees and trade unions, who wish to check on the financial prospects of the business the tax authorities, who will wish to see that tax due by the business on profits and for Value Added Tax has been paid competitors, who wish to assess the profitability of the business potential investors in the business the local community and national interest groups, who may be seeking to influence business policy government and official bodies, eg Companies House who need to see the final accounts of limited companies Business entity the accounts record and report on the financial transactions of a particular business, and not the owner's personal financial transactions. Money measurement the accounting system uses money as the common denominator in recording and reporting all business transactions; thus the loyalty of a firm's workforce or the quality of a product cannot be recorded because these cannot be reported in money terms. assets items owned by a business; liabilities items owed by a business debtors individuals or businesses who owe money in respect of goods or services supplied by the business; creditors individuals or businesses to whom money is owed by the business purchases goods bought, whether on credit or for cash, which are intended to be resold later; sales the sale of goods, whether on credit or for cash, in which the business trades credit purchases goods bought, with payment to be made at a later date; cash purchases goods bought, with immediate payment made in cash, by cheque, debit card, credit card, or bank transfer Dr 20-1 23 Feb Bank Drawings Account 200 20-1 Cr Dr 20-1 Dr 20-1 Bank Loan Account 20-1 14 Feb Bank Cr 2,500 Dr 20-1 12 Feb 25 Feb Bank Bank Wages Account 425 380 20-1 Cr Dr 20-1 8 Feb Bank Rent Paid Account 750 20-1 Cr
1.5
(a) (b)
Commission Income Account 20-1 20 Feb Bank
Cr 145
1.6
Dr 20-1 28 Feb
Bank
Van Account 20-1 6,000
Cr
2.5
Dr 20-7 1 Nov 7 Nov 23 Nov 25 Nov 28 Nov Dr 20-7 Capital Bank loan Cash Office fittings Commission received
Bank Account 75,000 70,000 100 200 200 20-7 3 Nov 10 Nov 12 Nov 14 Nov 20 Nov Photocopier Office premises Business rates Office fittings Wages
Cr 2,500 130,000 3,000 1,500 250 Cr Bank 75,000 Cr
2.3
Dr 20-5 1 Aug 15 Aug 20 Aug 25 Aug
Capital S Orton: loan Office fittings Commission received
Bank Account 20-5 5,000 3 Aug 1,000 7 Aug 250 12 Aug 150 27 Aug
Computer Rent paid Office fittings S Orton: loan
Cr 1,800 100 2,000 150
Capital Account 20-7 1 Nov
Dr 20-5
Capital Account 20-5 1 Aug
Bank
Cr 5,000
Dr 20-7 3 Nov Dr Bank
Photocopier Account 2,500 20-7
Bank Loan Account 20-7 7 Nov Bank
Cr 70,000 Cr
Dr 20-5 3 Aug
Bank
Computer Account 20-5 1,800
Cr
20-7
Dr Dr 20-5 7 Aug Rent Paid Account 20-5 100 Cr 20-7 10 Nov Dr Dr 20-5 Commission Income Account 20-5 10 Aug Cash 25 Aug Bank Cr 200 150 20-7 12 Nov Dr 20-7 14 Nov Dr 20-7 15 Nov Commission received Bank Bank Bank
Office Premises Account 130,000 20-7
Bank
Rates Account 3,000 20-7
Cr
Office Fittings Account 1,500 20-7 25 Nov Bank
Cr 200 Cr
Dr 20-5 10 Aug
Commission received
Cash Account 20-5 200 17 Aug
Drawings
Cr 100
Cash Account 300 20-7 18 Nov 23 Nov Drawings Bank
Dr 20-5 12 Aug
Bank
Office Fittings Account 20-5 2,000 20 Aug Bank
Cr 250
125 100 Cr 300 200 Cr
Dr 20-7
Commission Income Account 20-7 15 Nov 28 Nov Cash Bank
Dr 20-5 27 Aug
Bank
Sally Orton: Loan Account 20-5 150 15 Aug Bank
Cr 1,000 Dr 20-7 18 Nov Dr 20-7 20 Nov Bank 125
Drawings Account 20-7 Cash
Dr 20-5 17 Aug
Cash
Drawings Account 20-5 100
Cr
Wages Account 250 20-7
Cr
2.6 20-7 1 Nov 3 Nov 7 Nov 10 Nov 12 Nov 14 Nov 20 Nov 23 Nov 25 Nov 28 Nov 2.7 Capital Photocopier Bank loan Office premises Rates Office fittings Wages Cash Office fittings Commission received
Bank Account Debit 75,000 70,000 130,000 3,000 1,500 250 100 200 200 Credit 2,500 Balance 75,000 72,500 142,500 12,500 9,500 8,000 7,750 7,850 8,050 8,250
Dr 20-2 Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr
J Smithson: Loan Account 20-2 12 Oct Bank Delivery Van Account 20-2 4,000
Cr 2,000 Cr
Dr 20-2 22 Oct
Bank
Dr 20-2 25 Oct
Bank
Wages Account 20-2 375
Cr
Guidance to the trainee to include: the use of accounts to record different types of transactions the principles of double-entry book-keeping whereby one account is debited and one account is credited for every business transaction the debit entry is made in the account which gains value, or records an asset, or an expense the credit entry is made in the account which gives value, or records a liability, or an income item examples can be given using bank account where money in is recorded on the debit side, and money out is recorded on the credit side an explanation of various accounts including capital the amount of money invested in the business by the owner fixed assets items purchased by a business for use on a long-term basis (noting the distinction between capital expenditure and revenue expenditure) expenses the day-to-day running expenses (revenue expenditure) of the business income amounts of income received by the business owners drawings where the owner takes money in cash or by cheque (or sometimes goods) from the business for personal use loans where a business receives a loan, eg from a relative or the bank
3.5
Dr 20-2 2 Apr 4 Apr
Wyvern Producers Ltd A Larsen
Purchases Account 20-2 200 250
Cr
Dr 20-2 9 Apr 20 Apr
Purchases returns Bank
Wyvern Producers Ltd 20-2 50 2 Apr Purchases 150
Cr 200
Dr 20-2 26 Apr
Purchases returns
45
A Larsen 20-2 4 Apr
Purchases
Cr 250
CHAPTER 3 Double-entry book-keeping: further transactions 3.1 Dr 20-2 1 Oct 4 Oct 8 Oct 12 Oct 18 Oct 30 Oct Dr 20-2 Bank Account 20-2 2,500 2 Oct 150 6 Oct 125 14 Oct 2,000 22 Oct 155 25 Oct 110 Capital Account 20-2 1 Oct Purchases Account 20-2 200 90 250 Sales Account 20-2 4 Oct 8 Oct 18 Oct 30 Oct Cr 200 90 250 4,000 375
Dr 20-2
Capital Sales Sales K Smithson: loan Sales Sales
Purchases Purchases Purchases Delivery van Wages
Sales Account 20-2 5 Apr 7 Apr 12 Apr 28 Apr
Pershore Patisserie Bank Bank Cash
Cr 150 175 110 100
Bank
Cr 2,500 Cr
Dr 20-2 5 Apr
Sales
Pershore Patisserie 20-2 150 15 Apr Sales returns 22 Apr Bank
Cr 25 125
Dr 20-2 2 Oct 6 Oct 14 Oct Dr 20-2
Bank Bank Bank
Dr 20-2 7 Apr 12 Apr 22 Apr
Sales Sales Pershore Patisserie
Bank Account 20-2 175 20 Apr 110 30 Apr 125
Wyvern Producers Ltd Amery Scales Ltd
Cr 150 250
Bank Bank Bank Bank
Cr 150 125 155 110
Dr 20-2
Purchases Returns Account 20-2 9 Apr Wyvern Producers Ltd 26 Apr A Larsen
Cr 50 45
Dr 20-2 15 Apr
Pershore Patisserie
Sales Returns Account 20-2 25
Cr
Dr 20-3
Purchases Returns Account 20-3 6 Jun Designs Ltd 17 Jun Mercia Knitwear Ltd
Cr 100 80
Dr 20-2 17 Apr
Amery Scales Ltd
Weighing Machine Account 20-2 250
Cr
Dr 20-3 17 Jun
Purchases returns
Mercia Knitwear Ltd 20-3 80 7 Jun Purchases
Cr 400
Dr 20-2 30 Apr
Bank
Amery Scales Ltd 20-2 250 17 Apr Weighing machine
Cr 250
Dr 20-3 10 Jun
Sales
Dr 20-2 28 Apr
Sales
Cash Account 20-2 100 29 Apr
Wages
Cr 90 Dr 20-3 15 Jun
Wyvern Trade Supplies 20-3 350 15 Jun Sales returns 28 Jun Bank
Cr 50 300
Dr 20-2 29 Apr
Cash
Wages Account 20-2 90
Cr
Wyvern Trade Supplies
Cr
3.6
Dr 20-3 2 Jun 7 Jun 23 Jun
Designs Ltd Mercia Knitwear Ltd Designs Ltd
Purchases Account 20-3 350 400 285
Cr 3.7
Dr 20-3 26 Jun
Cash
Rent Paid Account 20-3 125
Cr
Dr 20-3 6 Jun 18 Jun
Purchases returns Bank
Designs Ltd 20-3 100 2 Jun 250 23 Jun
Purchases Purchases
Cr 350 285
Transaction (a) (b) (c) (d) (e) (f) (g) (h)
Account debited purchases bank purchases L Harris Teme Traders sales returns bank cash
Account credited bank sales Teme Traders sales purchases returns L Harris D Perkins: loan bank
Dr 20-3
Sales Account 20-3 4 Jun 5 Jun 10 Jun 12 Jun 20 Jun
Bank Cash Wyvern Trade Supplies Bank Cash
Cr 220 115 350 175 180
3.8
Answers to the trainee: Separate accounts for purchases and sales enable the business to know the amount of goods bought and sold. A combined account for goods would not provide this information so readily. Purchases and sales accounts follow the principles of book-keeping in that the debit side of purchases account gains value when the business buys goods for resale, while the credit side of sales account gives value when the business sells goods. The purchase of a new delivery van for use in the business is the purchase of a fixed asset, which will be used on a long-term basis. As such the purchase of the van which is an example of capital expenditure is entered on the debit side of van account. Purchases returns (or returns out) is where we return goods to a creditor (supplier). The returns transaction is recorded the opposite way round to a purchases transaction. Sales returns (or returns in) is where a debtor (customer) returns goods to us. The transaction is recorded the opposite way round to a sales transaction.
Dr 20-3 4 Jun 12 Jun 28 Jun Dr 20-3 5 Jun 20 Jun Bank Account 20-3 220 18 Jun 175 300 Cash Account 20-3 115 26 Jun 180 Cr 250
Sales Sales Wyvern Trade Supplies
Designs Ltd
Sales Sales
Rent paid
Cr 125
Carriage inwards and carriage outwards are kept in separate accounts because they represent different transactions. Carriage inwards is where we pay the carriage cost of goods purchased to have them delivered to us. Carriage outwards is where we pay the carriage charge for goods we have sold, that is we have sold the goods to our customers as delivery free.
CHAPTER 4 Business documents 4.2
4.3
Unit 21, Eastern Industrial Estate, Wyvern, Wyvernshire, WY1 3XJ invoice to invoice to
JANE SMITH, FASHION WHOLESALER

invoice no account your reference date
INVOICE
DEANSWAY TRADING COMPANY

The Model Office, Deansway, Rowcester, RW1 2EJ
INVOICE
Excel Fashions 49 Highland Street Longton Mercia LT3 2XL

deliver to
2451
The Card Shop 126 The Cornbow Teamington Spa Wyvernshire WY33 0EG
deliver to
invoice no account your reference date
8234
today
today
as above
as above
product code
description
quantity
unit price
unit
total
trade discount %
net
product code
description
quantity
unit price 5.00 4.00 0.50
unit
total
trade discount % 0.00 0.00 0.00
net
Dresses Suits Coats
5 3 4
30.00 45.50 51.50
each each each
150.00 136.50 206.00
0.00 150.00 0.00 136.50 0.00 206.00
Assorted rubbers Shorthand notebooks Ring Binders
5 100 250
box 10 each
25.00 40.00 125.00
25.00 40.00 125.00
terms 2.5% cash discount for full settlement within 14 days Net 30 days
TOTAL
492.50
terms 2.5% cash discount for full settlement within 14 days Net 30 days
TOTAL
190.00
Excel Fashions will pay 480.18 (492.50 x 97.5%, rounded down) for settlement in full within 14 days.
The Card Shop will pay 185.25 (190.00 x 97.5%) for settlement in full within 14 days.
4.4
Dr 20-4 2 Feb 16 Feb
G Lewis G Lewis
Purchases Account 20-4 200 160 Sales Account 20-4 4 Feb 7 Feb G Lewis
Cr
4.5
(a) product code description quantity unit price unit total trade net discount %
Dr 20-4
L Jarvis G Patel
Cr 150 240
45B 35W
Trend tops (black) Trend trousers (white)
30 20
12.50 25.00
each each
375.00 500.00
10 10
337.50 450.00
Dr 20-4 10 Feb 10 Feb 24 Feb 24 Feb Bank Discount received Bank Discount received 190 10 152 8 360
Cr Purchases Purchases 200 160
20-4 2 Feb 16 Feb
360 L Jarvis
Dr 20-4 4 Feb Sales 150 150
Cr Bank Discount allowed 147 3 150
20-4 12 Feb 12 Feb
terms 5% cash discount for full settlement within 7 days Net 30 days
TOTAL
787.50
(b)
Trade discount is given, if prearranged: to businesses, often in the same trade (but not to the general public) for buying in bulk (this discount is also known as bulk discount) by wholesalers, as a discount off list price to retailers
Dr 20-4 7 Feb Sales 240 240
G Patel 20-4 20 Feb 20 Feb Bank Discount allowed
Cr 234 6 240 (c)
Cash discount (also known as settlement discount) is given, for prompt payment, if prearranged, and indicated on the invoice Fashion Shop will pay 748.12 (787.50 x 95%, rounded down) for settlement in full within 7 days.
Dr 20-4 12 Feb 20 Feb L Jarvis G Patel
Bank Account 147 234 20-4 10 Feb 24 Feb G Lewis G Lewis
Cr 190 152 4.7 (a) A source document is used to update the book-keeping records.
(b) Dr 20-4 Discount Received Account 20-4 10 Feb 24 Feb G Lewis G Lewis Cr 10 8
(i) (ii)
An invoice is a source document prepared by the seller and states the value of goods sold and, hence, the amount to be paid by the buyer. A credit note is a source document which shows that the buyer is entitled to a reduction in the amount charged by the seller; it is used if: some of the goods delivered were faulty, or incorrectly supplied the price charged on the invoice was too high
Dr 20-4 12 Feb 20 Feb L Jarvis G Patel
Discount Allowed Account 3 6 20-4
Cr (c) Any three from: cheque counterfoils paying-in slip counterfoils cash receipts till rolls information from bank statements, such as standing orders, direct debits, BACS, credit transfers, bank charges
4.8
(a)
5 computer desks were ordered (not 10 as shown on the invoice) 10 office chairs were ordered (not 5 as shown on the invoice) the unit price of the computer desks is 65.00 each (not 70.00 as shown on the invoice) the net amount for computer desks is 292.50 (not 350.00 as shown on the invoice) the net amount for office chairs is 180.00 (not 20.00 as shown on the invoice) the invoice total is 472.50 (not 370.00 as shown on the invoice)
CHAPTER 5 Balancing accounts the trial balance 5.1 (a) and (c) Dr 20-9 1 Jan 11 Jan 12 Jan 22 Jan 1 Feb 4 Feb 10 Feb 12 Feb 19 Feb 25 Feb 1 Mar Bank Account 20-9 10,000 4 Jan 1,000 5 Jan 1,250 20 Jan 1,450 31 Jan 13,700 6,700 2 Feb 1,550 15 Feb 1,300 27 Feb 750 28 Feb 1,600 1,100 13,000 5,300 Cr 500 1,500 5,000 6,700 13,700 500 850 6,350 5,300
(b)
Capital Sales Sales Sales Balance b/d Sales Sales Rowcester College Sales Sales Balance b/d
Rent paid Shop fittings Comp Supplies Ltd Balance c/d Rent paid Shop fittings Comp Supplies Ltd Balance c/d
13,000
Dr 20-9
Capital Account 20-9 1 Jan
Bank
Cr 10,000
Dr 20-9 4 Jan 2 Feb 1 Mar
Bank Bank Balance b/d
Rent Paid Account 20-9 500 28 Feb Balance c/d 500 1,000 1,000
Cr 1,000 1,000
Dr 20-9 5 Jan 15 Feb 1 Mar
Bank Bank Balance b/d
Shop Fittings Account 20-9 1,500 28 Feb Balance c/d 850 2,350 2,350
Cr 2,350 2,350
Dr 20-9 7 Jan 25 Jan
Comp Supplies Ltd Comp Supplies Ltd
Purchases Account 20-9 5,000 31 Jan Balance c/d 6,500 11,500 11,500 5,500 17,000 17,000 28 Feb Balance c/d
Cr 11,500 11,500 17,000 17,000
1 Feb 24 Feb (c) Wyvern Products Limited will pay 448.87 (472.50 x 95%) for settlement in full within 14 days. 1 Mar
Balance b/d Comp Supplies Ltd Balance b/d
Dr 20-9 20 Jan 31 Jan 5 Feb 27 Feb 28 Feb
Bank Balance c/d Purchases returns Bank Balance c/d
Comp Supplies Limited 20-9 5,000 7 Jan Purchases 6,500 25 Jan Purchases 11,500 150 1 Feb Balance b/d 6,350 24 Feb Purchases 5,500 12,000 1 Mar Balance b/d
Cr 5,000 6,500 11,500 6,500 5,500 12,000 5,500
(b) Name of Account Bank Capital Rent paid Shop fittings Purchases Comp Supplies Limited Sales Rowcester College Sales returns
Trial balance as at 31 January 20-9 Dr 6,700 500 1,500 11,500 6,500 4,550 750 100 21,050 Trial balance as at 28 February 20-9 Name of Account Bank Capital Rent paid Shop fittings Purchases Comp Supplies Limited Sales Rowcester College Sales returns Purchases returns Dr 5,300 1,000 2,350 17,000 5,500 11,150 1,050 100 150 26,800 26,800 Cr 10,000 21,050 Cr 10,000
Dr 20-9 31 Jan
Balance c/d
28 Feb
Balance c/d
Sales Account 20-9 4,550 11 Jan 12 Jan 16 Jan 22 Jan 4,550 11,150 1 Feb 4 Feb 10 Feb 19 Feb 25 Feb 26 Feb 11,150 1 Mar
Bank Bank Rowcester College Bank Balance b/d Bank Bank Bank Bank Rowcester College Balance b/d
Cr 1,000 1,250 850 1,450 4,550 4,550 1,550 1,300 1,600 1,100 1,050 11,150 11,150
(d)
Dr 20-9 16 Jan
Sales
Rowcester College 20-9 850 27 Jan Sales returns 31 Jan Balance c/d 850 750 1,050 1,800 1,050 12 Feb 28 Feb Bank Balance c/d
Cr 100 750 850 750 1,050 1,800
5.2
Trial balance of Jane Greenwell as at 28 February 20-1 Dr Name of account Bank Purchases Cash Sales Purchases returns Creditors Equipment Van Sales returns Debtors Wages Capital (missing figure)
Cr 1,250
1 Feb 26 Feb 1 Mar
Balance b/d Sales Balance b/d
850 48 730 144 1,442 2,704 3,200 90 1,174 1,500 6,000 9,566 9,566
Dr 20-9 27 Jan
Rowcester College
Cr
Dr 20-9
Purchases Returns Account 20-9 5 Feb Comp Supplies Ltd
Cr 150
5.5
Four from: Error of omission Business transaction completely omitted from the accounting records. For example, cash sale omitted from both cash account and sales account. Reversal of entries Debit and credit entries on the wrong side of the two accounts concerned. For example, cash sale entered wrongly as debit sales account, credit cash account. Mispost/error of commission Transaction entered to the wrong person's account. For example, a sale of goods on credit to A T Hughes has been entered as debit A J Hughes' account, credit sales account. Error of principle Transaction entered in the wrong type of account. For example, cost of petrol for vehicles has been entered as debit motor vehicles account, credit bank account. Error of original entry (or transcription) Amount entered incorrectly in both accounts. For example, sale of 45 entered in both sales account and the debtor's account as 54. Compensating error Two errors cancel each other out. For example, balance of purchases account calculated wrongly at 10 too much, compensated by the same error in sales account. Dr 20-2 Dr 20-2 Dr 20-2
PURCHASES LEDGER Softseat Ltd 20-2 1 Feb 19 Feb Purchases Purchases Cr 320 160
PRK Ltd 20-2 2 Feb Purchases
Cr 80
Quality Furnishings 20-2 15 Feb Purchases
Cr 160
SALES LEDGER CHAPTER 6 Division of the ledger the use of subsidiary books 6.2 (a) Date 20-2 1 Feb 2 Feb 15 Feb 19 Feb 28 Feb Softseat Ltd PRK Ltd Quality Furnishings Softseat Ltd Total for month 961 068 529 984 Details Purchases Day Book Invoice Reference Amount 320 80 160 160 720 Dr 20-2 14 Feb Sales Peter Lounds Ltd 120 20-2 Cr Dr 20-2 8 Feb 25 Feb Sales Sales High Street Stores 440 200 20-2 Cr
Dr Sales Day Book Date 20-2 8 Feb 14 Feb 18 Feb 25 Feb 28 Feb High Street Stores Peter Lounds Ltd Carpminster College High Street Stores Total for month 001 002 003 004 Details Invoice Reference Amount 440 120 320 200 1,080 Dr 20-2 Dr 20-2 28 Feb Purchases Day Book 20-2 18 Feb Sales
Carpminster College 320 20-2
Cr
GENERAL LEDGER Purchases Account 720 20-2 Cr
Sales Account 20-2 28 Feb Sales Day Book
Cr 1,080
6.3 (a) Date 20-2 2 May 4 May 10 May 18 May 21 May 25 May 31 May M Roper & Sons Wyper Ltd Wyper Ltd M Roper & Sons Wyper Ltd M Roper & Sons Total for month Details
Purchases Day Book Invoice 562 82 86 580 91 589 Reference PL 302 PL 301 PL 301 PL 302 PL 301 PL 302 Amount 190 200 210 180 240 98 1,118.00 Dr 20-2 Dr 20-2 31 May Purchases Day Book
GENERAL LEDGER Purchases Account 1,118.00 20-2 Cr
Purchases Returns Account 20-2 31 May Purchases Day Book
Cr 108.00
Purchases Returns Day Book Date 20-2 18 May 23 May 28 May 31 May M Roper & Sons Wyper Ltd M Roper & Sons Total for month 82 6 84 PL 302 PL 301 PL 302 Details Credit Note Reference Amount 30 40 38 108 product 6.5 (a)
code
X24
quantity
details
unit price
unit
total amount
96 20
Trend tops Jeans
8.50 each 15 each
each each
816.00 300.00 1,116.00
(b) and (c) PURCHASES LEDGER Dr 20-2 23 May 31 May Wyper Ltd (account no 301) 20-2 40 1 May Balance b/d 710 4 May Purchases 10 May Purchases 21 May Purchases 750 1 Jun Balance b/d Cr 100 200 210 240 750 710
Y36
trade discount 20%
223.20
Purchases Returns Balance c/d
total
892.80
Dr 20-2 18 May 28 May 31 May
Purchases Returns Purchases Returns Balance c/d
M Roper & Sons (account no 302) 20-2 30 1 May Balance b/d 38 2 May Purchases 485 18 May Purchases 25 May Purchases 553 1 Jun Balance b/d
Cr 85 190 180 98 553 485
terms 5% cash discount for full settlement within 7 days Net 30 days
10
(b)
(i) (ii)
Purchases day book Sales day book
CHAPTER 7 The main cash book 7.3
(c)
(i)
Trade discount: given for bulk buying (also known as bulk discount), or for being in the trade, or for regular customers deducted from the invoice before entry in the books usually a larger percentage than cash discount
Date 20-7 1 Aug 1 Aug 11 Aug 12 Aug 21 Aug 29 Aug 29 Aug
Dr
Details Balances b/d Wild & Sons Ltd Bank A Lewis Ltd Harvey & Sons Ltd Wild & Sons Ltd Bank
Ref
Disc allwd
Cash
Bank Date
Cash Book
Details T Hall Ltd Wages Cash F Jarvis Wages J Jones Salaries Telephone Cash Balances c/d
Ref
(ii)
Cash discount (also known as settlement discount): given for prompt payment not deducted until account is paid can be disallowed if terms are not met usually a smaller percentage than trade discount
20 15
276 4,928 398 500 1,755 261 595 275
6.8
Source
Document Invoice for goods sold on credit to V Singh (a) Invoice received for
Subsidiary Book
Account to be debited V Singh
be credited Sales
Account to
1 Sep Balances b/d 7.4 Dr Date
35 1,051 7,937 361 3,217
20-7 5 Aug 8 Aug 11 Aug 18 Aug 22 Aug 25 Aug 27 Aug 28 Aug 29 Aug 31 Aug
Disc recd 24
Cash 254 436
Bank 541 500 457 628 2,043 276 275 3,217 7,937
Cr
C 33 C 57
361 1,051
Sales day book
Details Balances b/d Sales* Sales Bank Sales Bank Sales Sales* Hobbs Ltd Pratley & Co
goods bought on credit from Okara Limited Credit note issued to Credit note received
Purchases day book Sales returns day book Purchases returns day book
Purchases Sales returns Roper &
Okaro Limited S Johnson Purchases returns
(b) (c)
S Johnson
from Roper & Company
Company
20-5 1 Mar 3 Mar 8 Mar 11 Mar 13 Mar 22 Mar 25 Mar 29 Mar 31 Mar 31 Mar
Ref Discount allowed
Cash
Cash Book Bank Date 20-5 2 Mar 5 Mar 9 Mar 11 Mar 16 Mar 18 Mar 20 Mar 22 Mar 26 Mar 27 Mar 30 Mar 31 Mar 31 Mar 31 Mar
C C 30 50
106 3,214 100 950 1,680 150 1,800 150 2,108 200 2,000 720 1,160
1 Apr Balances b/d
80
An alternative way of showing the transactions of 3 March and 29 March is to record the full amount of sales in the debit cash column, and then to show the amount banked as a separate transfer, ie debit bank, credit cash.
706 13,632 423 8,259
Cr Ref Discount Cash Bank received Rent 10674 250 Cleaning expenses 35 Purchases 10675 1,200 Cash 10676 C 150 Postages 50 Telephone 10677 168 Stationery 128 Cash 10678 C 150 Misc expenses 70 Wages 10679 2,000 Electricity 10680 106 Evans & Co 10681 45 855 A Bennett 10682 26 494 423 8,259 Balances c/d 71 706 13,632 Details
11
7.6
(i)
Standing order Money paid out of the bank directly, at regular intervals, on the businesss order. Usually for the same fixed amount for goods and services supplied DR Supplier/Creditor CR Bank
CHAPTER 8 Bank reconciliation statements 8.2 (a) Dr 20-7 1 Jan 13 Jan 1 Feb Cash Book (bank columns) p 20-7 Balance b/d 415.15 23 Jan Direct debit: Omni Finance BACS credit: T K Supplies 716.50 31 Jan Balance c/d 1,131.65 Balance b/d 923.70 Cr p 207.95 923.70 1,131.65
(ii)
Credit transfer for payment by a customer Amounts paid directly into the bank by a debtor, who has the necessary bank code information. DR Bank CR Customer/Debtor
7.8 Date 20-6

Dr
(a) and (b)

(b)
Details
1 Jan Balance b/d 6 Jan R Reed
Disc
Cash 50
Cash Book
Bank 567
Date 20-6
Details
13 Jan B Brown 14 Jan Sales 28 Jan Sales 31 Jan Cash
752 642
366
11 Jan Rent
2 Jan Bilton Office Supplies
1 Jan Balance b/d
Disc 3
Cash
1,236 450
Bank 164
Cr
P GERRARD BANK RECONCILIATION STATEMENT AS AT 31 JANUARY 20-7 Balance at bank as per cash book Add: unpresented cheques Bryant & Sons P Reid cheque no. 001354 cheque no. 001355 312.00 176.50 488.50 1,412.20 Less: outstanding lodgement G Shotton Limited Balance at bank as per cash book 335.75 1,076.45 923.70
27 Jan Wages
24 Jan C Denton & Co Ltd C/T C
1,319 4 1,444 50 2,500 422
248
21 Jan Bank interest 31 Jan Balances c/d 31 Jan Bank
20 Jan British Gas
S/O C 3
75
200 28
1,319 1,444 50
2,500
422
8.3
(a) Dr 20-7 1 May 7 May 16 May 23 May 30 May Balance b/d Cash C Brewster Cash Cash Cash Book (bank columns) 300 162 89 60 40 651 1 Jun Balance b/d 428 20-7 2 May 14 May 29 May 16 May 31 May 31 May P Stone 867714 Alpha Ltd 867715 E Deakin 867716 Standing order: A-Z Insurance Bank charges Balance c/d Cr 28 50 110 25 10 428 651
1 Feb Balance b/d
(c)
Dr 20-6 31 Jan Cash book Discounts Allowed Account 4 20-6 Cr (b)
JANE DOYLE BANK RECONCILIATION STATEMENT AS AT 31 MAY 20-7 Balance at bank as per cash book Add: unpresented cheque E Deakin cheque no. 867716 Less: outstanding lodgement cash banked Balance at bank as per bank statement 40 498 110 538 428
Dr 20-6
Discounts Received Account 20-6 31 Jan Cash book
Cr 3
12
8.5
(a)
(i)
Standing orders Credit Regular payments of the same amount made directly from the bank on behalf of the company on the order of the company.
8.7 Date 2003

Dr
(a) Details Bank p

Cash Book
(ii)
Direct debits Credit Payments made from the bank for the customer collected by the payee on the order of the customer usually for changing amounts.
3 Nov Toys for You 5 Nov B J Patel 5 Nov Dolls and Things
1 Nov Balance b/d
2,459.35
(iii)
Credit transfers Debit or Credit Receipts from customers paid directly into the bank of the payee. Payments to suppliers or wages into the bank of the payee.
3,219.00
234.00
1 Nov 10 Nov 1 Nov
Date 2003
Details Banks Ltd Wages Books & Paints Jones and Son
Cheque number
11346
23 Nov J A Smith Ltd 26 Nov Cash banked
1,142.00 560.00 340.00
23 Nov 25 Nov 30 Nov
12 Nov
11348
11347 11349
134.37 92.50
Bank p
Cr
276.89
25 Nov
Smith and Son Toy Designs Balance c/d HGF Finance
(b) Dr Credit transfer Balance c/d Cash Book Bank Account 540 Balance b/d 534 Standing order Direct debit Bank charges 1,074 Balance b/d Cr 378 230 420 46 1,074 534
11352
11351
11350
3,781.95 256.00 139.43
7,954.35 30 Nov Balance b/d 9 Nov J Black Ltd 2,027.23
7,954.35 S/O
2,027.23
1,245.98
C/T
246.98
12 Nov 23 Nov 30 Nov
18 Nov
Business rates Bank charges Balance c/d Proper Ins Co
S/O
547.90 45.89
145.65
2,274.21 1 Dec Balance b/d 1,534.77
2,274.21
1,534.77
(c)
A SMITH AND CO BANK RECONCILIATION STATEMENT AS AT 31 MARCH 2001 Balance at bank as per cash book Add: Less: unpresented cheques outstanding lodgement (uncleared bankings) cheque query Balance at bank as per bank statement Tutorial note: brackets indicate an overdraft Less: outstanding lodgement cash banked Balance at bank as per bank statement 340.00 2,696.75 270 265 535 (600) Balance at bank as per cash book Add: unpresented cheques HGF Finance Toy Designs 11351 11352 256.00 1,245.98 1,501.98 3,036.75 (534) 469 (65) 1,534.77 (b) JAMES JOLLY AND CO BANK RECONCILIATION STATEMENT AS AT 30 NOVEMBER 2003
13
CHAPTER 9 Introduction to final accounts 9.2
9.7
(a)
(i)
R MASTERS PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 MARCH 2002 Gross profit Add discount received Less expenses: Wages Carriage outwards Motor expenses Bank charges Net profit 56,231 350 56,581
23,980 3,600 4,500 450 32,530 24,051
9.5
CLARE LEWIS TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 20-4 Sales 144,810 Opening stock 16,010 Purchases 96,318 112,328 Less Closing stock 13,735 Cost of sales 98,593 Gross profit 46,217 Less expenses: Salaries 18,465 Heating and lighting 1,820 Rent and rates 5,647 Sundry expenses 845 Vehicle expenses 1,684 28,461 Net profit 17,756 BALANCE SHEET AS AT 31 DECEMBER 20-4 Fixed Assets Vehicles Office equipment Current Assets Stock Debtors Less Current Liabilities Creditors Bank overdraft Net Current Assets or Working Capital NET ASSETS FINANCED BY Capital Opening capital Add Net profit Less Drawings
(ii) Dr 2002 31 Mar 31 Mar Details Drawings Balance c/d Capital Account 2002 12,500 31 Mar 48,341 31 Mar 60,841 1 Apr (b) Two from: increased by net profit more capital introduced reduced by losses reduced by drawings Details Balance b/d Net profit Cr 36,790 24,051 60,841 48,341
Balance b/d
9,820 5,500 15,320
9.9
(a)
Dr 2001 Details
Sales Account p 2001 1 Dec 31 Dec Details Balance b/d Monthly total
Cr p 16,493.27 4,560.30 Cr Details p
13,735 18,600 32,335 12,140 5,820 17,960 14,375 29,695
Dr 2001 1 Dec 31 Dec Dr 2001 1 Dec 31 Dec Dr 2001 Details Details Balance b/d Monthly total Details Balance b/d Monthly total
Returns Inwards Account p 1,269.43 236.91 2001
Purchases Account p 10,276.41 2,769.56 2001 Details
Cr p
25,250 17,756 43,006 13,311 29,695
Returns Outwards Account p 2001 1 Dec 31 Dec Details Balance b/d Monthly total
Cr p 1,039.41 127.50
14
(b)
AMARYLLIS TRADING TRADING ACCOUNT FOR THE THREE MONTHS ENDED 31 DECEMBER 2001 Sales Less Returns inwards Less Cost of sales: Opening stock Add Purchases Less Returns out Add Carriage in Less Closing stock Gross profit 21,053.57 1,506.34 19,547.23 3. Telephone bill due to be paid in one months time Section: Reason: Current liabilities Short-term liability an amount owed by the business which needs to be paid within the next 12 months Tutorial note: the accounting treatment for a bill which has not been paid at the balance sheet date called an accrual of expenses is covered in detail in Chapter 12 11,879.06 871.26 15,311.19 2,640.96 12,670.23 6,877.00 4. Drawings for the year Section: Reason: Capital/Financed by/Represented by It is cash or goods taken out of the business by the owner, therefore it reduces the capital invested in the business.
2,560.87 13,045.97 1,166.91
(c)
(i) (ii) (iii)
Cost of sales Goods available for sale Turnover
12,670.23 15,311.19 19,547.23
CHAPTER 10 The general journal and correction of errors 10.2 (a) Date Details Stock Trading Stock valuation at 31 December 20-8 transferred to trading account (b) Reference GL GL Dr 22,600 22,600 Cr
9.10 Date To From Subject Today
MEMORANDUM
20-8 31 Dec
Mary Arbuthnot, proprietor of Marys Doll Shop Financial Accounting Student Balance sheet queries
1.
Cost of new delivery van Section: Reason: Fixed assets An asset purchased for use in the business not for resale used over a long period/more than one year will help generate profits will depreciate with use is a tangible asset
Date 20-8 31 Dec
Details Profit and loss Telephone expenses Transfer to profit and loss account of expenditure for the year
Reference GL GL
Dr 890
Cr 890
(c) Date 20-8 31 Dec Drawings Motoring expenses Transfer of private motoring to drawings account continued GL GL Details Reference Dr 200 200 Cr
2.
Stock of dolls for resale Section: Reason: Current assets An asset remaining in the business for the short-term less than one year the business is expected to sell them shortly
15
(d) Date 20-8 31 Dec Drawings Purchases Goods taken for own use by the owner (e) Date 20-8 31 Dec Bad debts written off N Marshall Account of N Marshall written off as a bad debt - see memo dated ................... GL SL Details Reference Dr 125 125 Cr GL GL Details Reference Dr 175 175 Cr
(c) Date
error of principle Details Delivery van Vehicle expenses Correction of error vehicle no ............ invoice no ............... Reference GL GL Dr 10,000 10,000 Cr
(d) Date
reversal of entries Details Postages Bank Postages Bank Correction of reversal of entries on ................... Reference GL GL GL GL 110 55 55 110 Dr 55 55 Cr
10.4
(a) Date
error of omission (e) Details J Rigby Sales Sales invoice no ............. omitted from the accounts. Correction of under-cast on purchases account and purchases returns account on .......(date)....... Reference SL GL Dr 150 150 Purchases Purchases returns GL GL Cr Date Details Reference Dr 100 100 Cr compensating error
(b) Date
mispost/error of commission Details H Price Limited H Prince Correction of mispost cheque no .....: to H Price Limited Reference PL PL Dr 125 125 Cr
(f) Date
error of original entry Details L Johnson Bank Bank L Johnson Correction of error cheque for 89 received on ....(date).... Reference SL GL GL SL 187 89 89 187 Dr 98 98 Cr
16
10.6
(a)
Two from: trial balance bank reconciliation statement control accounts (see Chapter 11) JOURNAL Account Dr (1) Sales Suspense 270 270 Cr
(c) Error An error of principle has occurred. The sales account has been totalled incorrectly. An invoice has been completely omitted from the books. A cheque has been debited in the cash book as 150 but credited in the customers account as 105. 3 3 Yes No 3 3
(b)
(2)
Returns inwards Suspense Returns inwards Suspense
500 500 300 300 10.10 (a) Dr Date 2004 30 Apr Details Suspense Account Date 2004 30 Apr 30 Apr Details Cr
(3)
Suspense Discount received
400 400
Balance per T/B
450 450
Sales Rent paid
200 250 450
(4)
J Jones A Jones
350 350
Tutorial note: The mispost between J Jones and A Jones needs to be corrected in the sales ledger, but has no effect on suspense account. Tutorial notes: 10.8 (a) and (b) H G PATEL: TRIAL BALANCE AS AT 30 APRIL 2003 Account Wages Administration costs Capital Premises Motor vehicles Motor expenses Purchases Sales Returns outwards Carriage inwards Carriage outwards Discount received Drawings Suspense TOTAL Dr 23,890 6,000 65,000 5,000 1,650 38,900 98,000 3,698 367 450 2,135 6,900 15,676 163,833 (c) Cr Error (2) is an error of original entry which affects both the debit and credit side of the trial balance by the same amount, and will not be revealed by the trial balance. Such an error is not entered in the suspense account. Error (3) has been entered in the suspense account, above, as the net amount of 250 (ie 650 400); as an alternative, it could have been entered as 60,000 (b) debit 400 (to take out the old amount in rent paid account) credit 650 (to enter the correct amount in rent paid account)
Error of commission (or mispost): example payment to A Brown entered to B Browns account explanation although the entry has been misposted to the wrong persons account, the trial balance will still balance because the entry has been made on the correct side of the account.
Sales ledger control account (see Chapter 11)
163,833
17
10.11
Jonathon Smith Corrected Profit for the year ended 30 November 2004 Profit calculated by Jonathon 1. 2. 3. 4. 5. 6. Sales undercast Discount allowed (2 x 140) Wages Fixed asset Error of commission no effect on profit Closing stock (reduction in cost of sales) Corrected profit add 100 34,060 add less less add 26,790 450 280 2,500 9,500
(b) Dr 20-8 1 Feb 28 Feb Balances b/d Credit sales
Sales Ledger Control Account p 2,012.43 1,288.76 20-8 28 Feb 28 Feb 28 Feb 28 Feb 28 Feb 28 Feb 3,301.19 Sales returns Cheques received from debtors Cash discount allowed Set-off: purchases ledger Bad debts written off Balances c/d
Cr p 221.67 911.43 23.37 364.68 59.28 1,720.76 3,301.19
1 Mar
Balances b/d
1,720.76
CHAPTER 11 Control accounts 11.3 (a) Dr 20-8 1 Feb 3 Feb SALES LEDGER (c) Arrow Valley Retailers p 20-8 826.40 20 Feb Bank 338.59 20 Feb Discount allowed 28 Feb Balance c/d 1,164.99 338.59 B Brick (Builders) Limited p 20-8 59.28 28 Feb Bad debts written off Mereford Manufacturing Company p 20-8 293.49 24 Feb Sales returns 127.48 28 Feb Set-off: purchases ledger 420.97 Redgrove Restorations p 20-8 724.86 7 Feb Sales returns 394.78 28 Feb Balance c/d 1,119.64 954.26 Wyvern Warehouse Limited p 20-8 108.40 15 Feb Bank 427.91 15 Feb Discount allowed 28 Feb Balance c/d 536.31 427.91 Cr p 805.74 20.66 338.59 1,164.99 Reconciliation of sales ledger control account with debtor balances 1 February 20-8 p 826.40 59.28 293.49 724.86 108.40 2,012.43 28 February 20-8 p 338.59 954.26 427.91 1,720.76
Balance b/d Sales
1 Mar
Balance b/d
Dr 20-8 1 Feb
Balance b/d
Cr p 59.28
Arrow Valley Retailers B Brick (Builders) Limited Mereford Manufacturing Company Redgrove Restorations Wyvern Warehouse Limited Sales ledger control account
Dr 20-8 1 Feb 3 Feb
Balance b/d Sales
Cr p 56.29 364.68 420.97
11.5
Dr 2001 1 Mar 31 Mar Balance b/d Returns Set-off: sales ledger Discounts Cash paid Balance c/d
Purchase Ledger Control Account 465 4,679 475 3,674 236,498 24,742 270,533 749 2001 1 Mar 31 Mar Balance b/d Purchases Cash refunds Balance c/d
Cr 23,437 245,897 450 749
Balance b/d Sales
Cr p 165.38 954.26 1,119.64
270,533 Balance b/d 24,742
1 Mar
Balance b/d
Balance b/d Cr p 105.69 2.71 427.91 536.31
Balance b/d Sales
Tutorial note: The cash purchases figure of 25,679 is not shown in the control account because it does not involve the accounts of creditors it is a cash purchase (ie debit purchases; credit bank/cash)
1 Mar
Balance b/d
18
11.6
Dr 20-5 1 Jan 31 Jan 31 Jan Balance b/d Sales Returned cheque
Sales Ledger Control Account 44,359 27,632 275 20-5 31 Jan 31 Jan 31 Jan 31 Jan 31 Jan Bank Discount allowed Sales returns Set-off: purchases ledger Balance c/d
Cr 23,045 1,126 2,964 247 44,884 72,266
CHAPTER 12 Adjustments to final accounts 12.1 (a) (b) (c) Expense in profit and loss account of 56,760; balance sheet shows wages and salaries accrued (current liability) of 1,120. Expense in profit and loss account of 2,852; balance sheet shows rates prepaid (current asset) of 713. Expense in profit and loss account of 1,800; balance sheet shows computer rental prepaid (current asset) of 150. SOUTHTOWN SUPPLIES TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 20-9 Sales 420,000 Opening stock 70,000 Purchases 280,000 350,000 Less Closing stock 60,000 Cost of sales 290,000 Gross profit 130,000 Less expenses: Rent and rates 10,250 550 9,700 Electricity 3,100 Telephone 1,820 Salaries 35,600 + 450 36,050 Vehicle expenses 13,750 64,420 Net profit 65,580
72,266 1 Feb Balance b/d 44,884
12.2
Tutorial note: The mispost of 685 between J Hampton and Hampton Limited needs to be corrected in the sales ledger, but has no effect on the control account.
11.7
(a) Dr 2003 1 Nov 30 Nov Details Balance b/d Sales Sales Ledger Control Account 5,476 26,500 2003 Details 30 30 30 30 Nov Nov Nov Nov Returns inwards Bank (receipts from customers) Set-off: purchases ledger Balance c/d Cr 590 18,900 400 12,086 31,976
31,976 1 Dec Balance b/d 12,086
Dr 2003 30 Nov 30 Nov 30 Nov 30 Nov Details Returns outwards Bank (payments to suppliers) Set-off: sales ledger Balance c/d
Purchases Ledger Control Account 450 16,300 400 5,410 22,560 1 Dec Balance b/d 2003 Details 1 Nov Balance b/d 30 Nov Purchases
Cr 2,960 19,600 12.7 HAZEL HARRIS TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 20-4 Sales 614,000 Opening stock 63,000 Purchases 465,000 528,000 Less Closing stock 88,000 Cost of sales 440,000 Gross profit 174,000 Add Discount received 8,140 182,140 Less expenses: Building repairs 8,480 Vehicle expenses 2,680 Wages and salaries 86,060 + 3,180 89,240 Discount allowed 10,610 5,620 Rates and insurance 6,070 450 15,860 General expenses Depreciation: vehicles 12,000 x 20% 2,400 furniture and fittings 25,000 x 10% 2,500 137,390 Net profit 44,750
22,560 5,410
(b)
The balances of the individual accounts of debtors in the sales ledger are totalled. The balances of the individual accounts of creditors in the purchases ledger are totalled. These totals should agree with the balances of sales ledger control account and purchases ledger control account respectively.
(c)
Some types of errors (such as a mispost/error of commission) will not be revealed by the control account. Thus the accounts will be thought to be correct when they are not. A control account may indicate that there is an error within a ledger section but it will not pinpoint where the error has occurred.
19
Fixed Assets Freehold land Vehicles Furniture and fittings
BALANCE SHEET AS AT 31 DECEMBER 20-4 Prov for dep'n Cost 100,000 12,000 4,800 25,000 5,000 137,000 9,800
BALANCE SHEET AS AT 31 DECEMBER 20-8 Net book value 100,000 7,200 20,000 127,200 Fixed Assets Shop fittings at cost Less provision for depreciation 2,400 + 2,400 Net book value Current Assets Stock Debtors Cash Prepayment of expenses Less Current Liabilities Creditors Bank Accrual of expenses 12,000 4,800 7,200 28,176 3,641 163 310 32,290 10,290 3,084 85 13,459 93,550 220,750 75,000 145,750 Net Current Assets or Working Capital NET ASSETS FINANCED BY Capital Add Net profit Less Drawings 125,000 44,750 169,750 24,000 145,750 18,831 26,031
Current Assets Stock Debtors Prepayment of expenses Less Current Liabilities Creditors Accrual of expenses Bank Net Current Assets or Working Capital Less Long-term Liabilities Bank loan NET ASSETS FINANCED BY Capital Opening capital Add Net profit Less Drawings
88,000 52,130 450 140,580 41,850 3,180 2,000 47,030
20,806 27,421 48,227 22,196 26,031
12.10
(a) Dr Date 2007 Details Telephone Account Date Details 2007 Cash/bank Balance c/d 2,400 130 2,530 1 Jun Balance b/d 210 1 Jun Balance b/d 31 May Profit and loss account 31 May Balance c/d 2,320 210 2,530 130 Cr
12.9
BETH DAVIS PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 20-8 Gross profit 95,374 Less expenses: Wages and salaries 55,217 Heating and lighting 1,864 Rent and rates 5,273 310 4,963 Advertising 2,246 Bad debts written off 395 868 General expenses 783 + 85 Depreciation of shop fittings 12,000 x 20% 2,400 67,953 Net profit 27,421 31 May 31 May
20
(b)
CHAPTER 13 Business organisations 13.2 The final accounts of a sole trader comprise: MEMORANDUM trading and profit and loss account balance sheet
The trading and profit and loss account shows: income minue expenses equals net profit (or loss)
To: From: Date: Subject:
The Owner, Beta Batteries Student Accountant Today Account of J Booth
The trading account shows gross profit, while the profit and loss account shows net profit (or loss) The balance shows shows: assets minus liabilities equals capital
Assets are items owned by the business; liabilities are amounts owed by the business; capital is the amount of the owners investment.
I note that a customer of Beta Batteries, J Booth, has been declared bankrupt whilst owing you 350. You are of the opinion that none of the debt will be recovered. The accounting treatment is that the amount of 350 should be treated as a bad debt written off. To do this you will need to: debit bad debts written off account credit J Booths account in your sales ledger If you use a sales ledger control account you should also credit this memorandum account with the amount. For the year end accounts, you will need to transfer the amount of the bad debt to profit and loss account as an expense: debit profit and loss account credit bad debts written off account The effect of writing off this bad debt will be to reduce your net profit by 350 and, at the same time, the debtors figure in your balance sheet will be reduced by the amount, so reducing the net assets of the business.
13.3
(a) (b)
The Partnership Act 1890 defines a partnership as the relation which subsists between persons carrying on a business in common with a view of profit. Where no partnership agreement exists, then the following accounting rules from the Partnership Act 1890 must be followed: profits and losses are to be shared equally between the partners no partner is entitled to a salary partners are not entitled to receive interest on their capital interest is not to be charged on partners drawings when a partner contributes more capital than agreed, he or she is entitled to receive interest at five per cent per annum on the excess
Note: the question asks for any three provisions.
13.5
Points to cover include: * Definition of a limited company separate legal entity owned by shareholders managed by directors
Types of companies public limited company private limited company company limited by guarantee
Advantages of forming a limited company limited liability separate legal entity ability to raise finance membership other factors
21
CHAPTER 14 Accounting concepts and stock valuation 14.1 Going concern concept This presumes that the business to which the final accounts relate will continue to trade in the foreseeable future. The trading and profit and loss account and balance sheet are prepared on the basis that there is no intention to reduce significantly the size of the business or to liquidate the business. If the business was not a going concern, assets would have very different values, and the balance sheet would be affected considerably. Example: As a going concern, fixed assets are valued at cost, less accumulated depreciation to date; stock is valued at cost (unless net realisable value is lower). Accruals concept This means that expenses and income for goods and services are matched to the same time period. Examples: The accrual of an expense in profit and loss account which has been used in the accounting period but not yet paid for. The prepayment of an expense for the next accounting period. The recording of opening and closing stocks in the trading account. The use of debtors' and creditors' accounts to record amounts owing to the business, or owed by the business. Materiality concept This means that some items in accounts have such a low monetary (money) value that it is not worthwhile recording them separately. Examples include: small expense items which may not justify their own separate expense account and are, instead, grouped together in a sundry expenses account end-of-year stocks of office stationery are often not valued for the purpose of final accounts because the amount is not material and does not justify the time and effort involved low-cost fixed assets are often charged as an expense in profit and loss account because, while strictly these should be treated as fixed assets and depreciated each year, in practice they are treated as profit and loss account expenses as the amounts involved are not material such as a calculator, a stapler 1. 14.8 14.5
(d)
Examples (question asks for one example) valuation of stock depreciation of fixed assets bad debts written off provision for doubtful debts (see Chapter 15)
By applying the consistency concept, direct comparison between the final accounts of different years can be made.
(a)
The kettle should be valued at 16. Workings: 31 15 = 16 net realisable value (which is lower than the cost of 18)
(b)
Stock should be valued at the lower of cost or net realisable value whichever is the lower. This is an example of using the prudence concept.
Concept
Gross Profit no change
Net Profit decrease 4,000
Current Assets no change
Current Liabilities increase 4,000
Capital
Accruals
decrease 4,000
2.
Consistency
no change
decrease 15,000
no change
no change
decrease 15,000
Materiality depends very much on the size of the business what is material and what is not becomes a matter of judgement. Business entity concept This refers to the fact that final accounts record and report on the activities of a particular business. For example, the personal assets and liabilities of those who play a part in owning or running the business are not included on the business balance sheet.
3.
Prudence or Consistency
decrease 18,000
decrease 18,000
decrease 18,000
no change
decrease 18,000
4.
Business entity
no change
increase 13,000
no change
no change
no change
14.2
(a)
The concept of prudence means not anticipating profit until it is reasonably certain that it will be realised providing for all known liabilities not giving an over-optimistic presentation of the business not overstating the value of assets
14.10
(a)
jacket, 40 (note: replacement cost is not applicable here) shirt, 25 suit, 80 trousers, 25 10 = 15 electric trouser press, 80
(b)
Examples (question asks for one example): valuation of stock, at the lower of cost and net realisable value depreciation of fixed assets, to measure the amount of the fall in value of fixed assets over time bad debts written off, to reduce the debtors figure to give a realistic view of the amount that the business can expect to receive provision for doubtful debts (see Chapter 15), to reduce the debtors figure (b) The prudence concept says that final accounts should always, where there is any doubt, report a conservative figure for profit or the valuation of assets. In stock valuation it is applied by using the lower of cost and net realisable value. (Note that net realisable value is the selling price of the goods, less further costs to get the stock into a saleable condition.) A lower closing stock figure means that profits are not overstated thus the amount drawn by the owner(s) will be reduced, so helping to ensure the continued financial viability of the business.
(c)
The concept of consistency means that, when a business adopts particular accounting policies, it should continue to use such policies consistently
22
CHAPTER 15 Further aspects of final accounts 15.2 Dr 20-7 31 Dec 31 Dec Commission Income Account 20-7 100 31 Dec Bank/Cash (receipts for year) 1,150 1,250 Cr 1,250
(b) Dr 20-9 31 Dec 20-0 Provision for Doubtful Debts Account 20-9 1,000 31 Dec Profit and loss account 20-0 1 Jan Cr 1,000
Balance c/d
Balance b/d (accrual of income) Profit and loss account
Balance b/d
1,000
1,250 (c) Profit and loss account (expenses) debit bad debts written off 420 debit provision for doubtful debts 1,000
Dr 20-7 31 Dec 31 Dec
Balance b/d (accrual of income) Profit and loss account
Advertising Income Account 20-7 150 31 Dec Bank/Cash (receipts for year) 2,820 31 Dec Balance c/d (accrual of income) 2,970 20-8
Cr 2,720 250 2,970
Explanation: profit for the year is reduced by 1,420 Balance sheet debtors 39,000 Workings: 40,420 420 bad debts = 40,000 1,000 provision for doubtful debts = 39,000 net debtors Explanation: current assets are reduced by 420 + 1,000 = 1,420
20-8 1 Jan
Balance b/d (accrual of income)
250
15.6 Year Profit and loss account Expense Bad debts written off 120 20-5 19,260 20-6 2,400 1,400 245 150 110 113,200 108,800 2,830 2,720 110,370 106,080 20-7 1,800 2,585 103,400 2,585 100,815 Increase in provision for doubtful debts Income Bad debts recovered Decrease in provision for doubtful debts Debtors (after bad debts written off) Balance sheet Less prov for doubtful debts Net debtors
Dr 20-7 31 Dec
Profit and loss account
Rent Income Account 20-7 19,260 31 Dec Balance b/d (prepayment of income) 31 Dec Bank/Cash (receipts for year) 31 Dec Balance c/d (accrual of income) 19,260 20-8
Cr 850 18,290
20-8 1 Jan
Balance b/d (accrual of income)
120
Workings for doubtful debts provision: 15.4 (a) Dr 20-9 31 Dec 31 Dec 31 Dec Bad Debts Written Off Account 20-9 110 31 Dec Profit and loss account 210 100 420 Cr 420 20-5 20-6 20-7 (105,200 1,800) x 2.5% = 2,585 creation of provision (115,600 2,400) x 2.5% = 2,830 2,585 = 245 increase in provision (110,200 1,400) x 2.5% = 2,720 2,830 = 110 decrease in provision
Webster Limited T Smith Khan and Company
420
23
15.12 15.8 (a) Year 1 Year 2 Straight-line method 3,000 3,000 Reducing balance method 3,600 1,440 (60%) or 2,400 (to disposal)
(a)
20,000 12,500 4,000 = loss of 3,500
(b)
BALANCE SHEET EXTRACT AS AT 31 DECEMBER 20-9 Fixed Assets Vehicle at cost Less provision for depreciation Net book value 25,000 3,125 21,875
(b)
Depreciation is a non-cash expense It is an accounting adjustment Depreciation is not a method of providing a fund of cash which can be used to replace the asset at the end of its life Profits are lower after depreciation has been deducted this may discourage drawings from the business 15.13 Vehicles Account Balance b/d Disposals (part-exchange allowance) Bank (balance paid by cheque) 12,000 5,500 9,500 27,000 27,000 20-9 20-8 1 Oct 31 Dec Disposals Balance c/d Cr 12,000 15,000 (a) Profit on disposal of old machine = 2,000 Workings 24,000 18,000 depreciation = 6,000 net book value Trade-in value Net book value at date of trade-in Profit on disposal 8,000 6,000 2,000 Tutorial note: Do not deduct the trade in allowance from the cost price of the new vehicle the cost price is 25,000.
15.11 (a) Dr 20-8 1 Jan 1 Oct 1 Oct
20-9 1 Jan
Balance b/d
15,000
(b) Dr 20-8 1 Oct 31 Dec 20-9 Disposals Balance c/d Provision for Depreciation Account Vehicles 7,200 3,000 10,200 20-8 1 Jan 31 Dec 20-9 1 Jan (c) Dr 20-8 1 Oct 31 Dec Vehicles Profit and loss account (profit on sale) Disposals Account Vehicles 12,000 700 12,700 BALANCE SHEET EXTRACT AS AT 31 DECEMBER 20-8 Cost Fixed assets Vehicles 15,000 Prov for depn 3,000 Net book value 12,000 20-8 1 Oct 1 Oct Vehicles (part-exchange allowance) Prov for depreciation Cr 5,500 7,200 12,700 Balance b/d Balance b/d Profit and loss account Cr 7,200 3,000 10,200 3,000
(b)
GORG HAMMAN BALANCE SHEET AS AT 31 DECEMBER 2003
Fixed Assets Machinery at cost Less prov for depreciation Net book value Current Liabilities Creditor instalment due on machine
176,000 123,500 52,500
(170,000 24,000 + 30,000) (105,000 18,000 + 36,500)
(11,000)
Tutorial notes: depreciation for 2003 is calculated at 25% straight-line method (being the rate applied to the old machine) therefore depreciation on remaining machinery is 170,000 24,000 = 146,000 x 25% = 36,500
(d)
24
15.16
THOMAS SALMON PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30 NOVEMBER 2004 Gross profit Add income: Discount received Rent receivable Less expenses: Wages Bad debts Rent and rates Other expenses Discount allowed Income in provision for doubtful debts Depreciation of fixed assets Loss on sale of van Net profit 26,320 340 4,630 21,435 286 *230 **9,000 ***100 62,341 7,270 119 720 69,611 68,772
16.4
(a)
ABEL BROWN TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2001 Sales 278,400 Less Cost of sales: 12,700 Opening stock Purchases 153,900 166,600 14,100 152,500 Less Closing stock Gross profit 125,900 Less expenses: Wages 75,400 Rent 2,280 Other expenses 25,120 Depreciation 15,000 117,800 Net profit 8,100 Workings: Wages 74,750 + 650 owing Rent 2,500 220 prepaid Depreciation 150,000 x 10%
(b)
New net profit: 11,100 Workings: Depreciation, using the straight-line method, at present is 15,000 (see above) Reducing balance depreciation will be 20% (150,000 90,000) = 20% x 60,000 = 12,000 Therefore reducing balance depreciation is 3,000 less this year than straight-line method, so profits will increase from 8,100 (see above) to 11,100.
* **
1,120 890 = 230 27,000 provision for depreciation at start of year 6,000 depreciation on van sold = 21,000, which is deducted from 30,000 provision for depreciation at end of year = 9,000 depreciation for year (as shown in profit and loss account) 2,000 1,900 100 16.5
*** Net book value (8,000 6,000) Sale price Loss on sale
JOHN HENSON TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 20-8 Sales Opening stock Purchases Less Closing stock Cost of sales Gross profit Add income: Discounts received Less expenses: Vehicle running expenses 1,480 + 230 Rent and rates Office expenses 2,220 120 Wages and salaries Depreciation: office equipment vehicle Net profit 6,250 71,600 77,850 8,500 69,350 52,650 285 52,935 1,710 5,650 2,100 18,950 1,000 3,000 32,410 20,525 122,000
CHAPTER 16 Preparing sole trader final accounts 16.1 (a) Capital expenditure cost of van air conditioning fitted shelving total (b) Revenue expenditure tax disc cost of extended warranty tank of fuel insurance premium total 165 220 40 450 875 11,650 550 350 12,550
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16.6 BALANCE SHEET AS AT 31 DECEMBER 20-8 Fixed Assets Office equipment Vehicle Cost 10,000 12,000 22,000 Prov for dep'n 1,000 3,000 4,000 Net book value 9,000 9,000 18,000
(a)
KEN TUCKY TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 MARCH 2006 Sales Less Returns inwards Opening stock Purchases 280,797 2,170 goods for own use 39,771 278,627 318,398 40,135 278,263 308,361 129,911 29,370 7,810 7,494 1,368 33,713 2,900 1,140 13,448 227,154 Net profit 81,207 587,461 837 586,624
Current Assets Stock Debtors Prepayment of expenses Bank 8,500 5,225 120 725 14,570 Less Closing stock Cost of sales Gross profit Less expenses: Wages 128,528 + 1,383 Motor expenses 47,870 18,500 Less Current Liabilities Creditors Accrual of expenses 4,910 230 5,140 Net Current Assets or Working Capital NET ASSETS 9,430 27,430 Rates Insurances 7,780 286 Bad debts written off General expenses Provision for depreciation: premises equipment motor vehicles FINANCED BY Capital Opening capital Add Net profit 20,000 20,525 40,525 Less Drawings 13,095 27,430 Depreciation calculations Premises: 145,000 x 2% = 2,900 Equipment: 11,400 x 10% = 1,140
Motor vehicles 42,000 + 18,500 acquisition = 60,500 26,880 depreciation to date = 33,620 x 40% = 13,448
(b)
Additional information 4 This is a prepayment of expenses. The amount is deducted from the expense to be shown in profit and loss account, ie 7,780 expense 286 prepayment = 7,494 to profit and loss account. The amount will be shown as a current asset in the balance sheet. The 286 will be included in the cost for insurances charged to next years profit and loss account. The accounting concept is accruals (or matching) expenses and revenues for goods and services are matched to the same time period, here the year ended 31 March 2006.
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(b)
Additional information 5 The owner has taken some of the goods in which the business trades for his own use. The amount, here 2,170, is deducted from purchases and added to the owners drawings (which will be deducted from capital in the balance sheet). The reason for reducing purchases is to ensure that only those purchases used in the business are recorded, which are then matched to the sales derived from them. The accounting concept is business entity which keeps separate from the business the personal assets and liabilities of the owner.
Workings: Purchases: 149,400 3,000 goods for own use 23,000 fixtures = 123,400 Closing stock: valued at the lower of cost, 8,700, and net realisable value, 11,500 Provision for doubtful debts: 9,000 debtors x 3% provision = 270, which is deducted from 310 existing provision = 40 reduction in provision for doubtful debts Wages and general expenses: 116,200 + 1,600 accrual = 117,800 Business rates: 13,510 180 prepayment = 13,330 Provision for depreciation of fixtures and fittings: 85,000 + 23,000 acquisition = 108,000 x 10% = 10,800 Provision for depreciation of vehicles: 160,000 80,400 depreciation to date = 79,600 x 40% = 31,840
(c)
A provision for doubtful debts should be created so that the balance sheet figure of net debtors is a reliable estimate of the amount that will be received. If a provision is not made, then profits will be overstated by the amount of doubtful debts. Creation of a provision for doubtful debts is shown as an expense in profit and loss account, and deducted from debtors in the balance sheet. The accounting concept is prudence. (b)
Example of capital expenditure: purchase of fixtures Example of revenue expenditure: wages and general expenses
(c) 16.8 (a) SIOBHAN HUGGETT TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30 APRIL 2004 Sales Opening stock Purchases 7,800 123,400 131,200 Less Closing stock Cost of sales Gross profit Add income: Reduction in provision for doubtful debts 40 170,640 Less expenses: Wages and general expenses Business rates Bad debts written off Provision for depreciation: fixtures and fittings vehicles 10,800 31,840 174,520 Net loss 3,880 117,800 13,330 750 8,700 122,500 170,600 16.9 (a) 293,100
Capital expenditure is expenditure incurred on the purchase, alteration or improvement of fixed assets. Revenue expenditure is expenditure incurred on running expenses. Capital expenditure is shown on the balance sheet (subject to the accounting concept of materiality), while revenue expenditure is an expense in the profit and loss account. It is important to classify these items of expenditure correctly in the accounting system so that the final accounts report reliably on the financial state of the business profit is stated accurately and the balance sheet shows the assets owned by the business.
WULLIE McDUFF PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30 SEPTEMBER 2005 807,850 100 65 808,015
Gross profit Add income: Bad debts recovered Reduction in provision for doubtful debts Less expenses: Wages Rent and rates General expenses Bad debts written off Loss on sale of vehicle Provision for depreciation: premises vehicles Net loss 2,400 7,500 748,432 12,140 37,898 760 200
809,330 1,315
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Workings: Provision for doubtful debts: 35,000 debtors x 2.5% provision = 875, which is deducted from 940 existing provision = 65 reduction in provision for doubtfut debts. Rent and rates: 12,460 320 prepayment = 12,140 General expenses: 36,980 + 918 accrual = 37,898 Loss on sale of vehicle: 20,000 cost 15,000 depreciation to date = 5,000 net book value at date of sale 4,800 sale proceeds = 200 loss on sale. Provision for depreciation of premises: 120,000 x 2% = 2,400 Provision for depreciation of vehicles: 60,000 30,000 depreciation to date = 30,000 x 25% = 7,500
CHAPTER 17 Financial statements of limited companies
17.1
(a)
Ordinary shares are the most commonly issued class of share. They take a share of the profits which remain after all other expenses of the business. The main risk of ordinary shares is that part or all of the value of the shares will be lost if the company loses money or becomes insolvent. Preference shares usually carry a fixed rate of dividend which is paid in preference to that of ordinary shareholders. In the event of the company ceasing to trade, the preference shareholders will also receive repayment of capital before the ordinary shareholders. Nominal value is the face value of a share which is entered in the accounts, eg 5p, 10p, 25p, 50p or 1. Market value is the price at which issued shares are traded, ie bought and sold. Capital reserves are created as a result of a non-trading profit; examples include revaluation reserve, share premium account. Revenue reserves are retained profits from the profit and loss account; examples include profit and loss account, retained profits, general reserve. A bonus issue is the capitalisation of reserves either capital or revenue in the form of free shares issued to existing shareholders in proportion to their holdings; no cash flows into the company. A rights issue is the raising of cash by offering shares to existing shareholders, in proportion to their holdings, at a favourable price.
(b)
(c)
(b)
The private limited is the most common form of limited company and is defined as any company that is not a public company (Companies Act 2006). Many private limited companies are small companies, often in family ownership and it would seem appropriate for Wullie McDuff to consider this form of business organisation.
(d)
Advantages include: limited liability the shareholders of the company can only lose the amount of their investment (together with any money unpaid on their shares); the personal assets of the shareholders are not available to the companys creditors separate legal entity a limited company is separate from the owners ability to raise finance the smaller company can raise funds from venture capital companies, relatives and friends; debentures can be issued to raise long-term finance from lenders and investors a limited company may have a higher standing and status in the business community, allowing it to benefit from economies of scale, and making it of sufficient size to employ specialists
17.2
(a) (b) (c) (d) (e) (f)
debenture interest is shown as an expense in profit and loss account directors' remuneration is shown as an expense in profit and loss account corporation tax is shown in the appropriation section of the profit and loss account, and any amount not yet paid is shown as a current liability on the balance sheet dividends proposed are shown in the appropriation section of profit and loss account and as a current liability on the balance sheet revaluation reserve is shown as a capital reserve as a part of the shareholders' funds section of the balance sheet goodwill is shown as an intangible asset in the fixed assets section of the balance sheet; it is amortised in the same way as tangible fixed assets are depreciated
Disadvantages include membership all ordinary shareholders have voting rights, so Wullie may lose some control of the business documentation there is more documentation eg the preparation of formal annual accounts for a company to produce than for a sole trader business; the costs of administering a company are higher than for a sole trader 17.4 (a) MASON MOTORS LTD PROFIT AND LOSS APPROPRIATION ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 20-1 Net profit before taxation Conclusion Wullie must consider the advantages and disadvantages of changing his business into a private limited company. If he is seeking to expand the business and raise finance, it would be sensible to consider this option. At the same time he would gain the benefit of limited liability. Less corporation tax Profit for year after taxation Less final ordinary dividend proposed 75,000 20,050 54,950 10,000 44,950 Less transfer to general reserve Retained profit for year Add balance of retained profits at beginning of year Balance of retained profits at end of year 20,000 24,950 100,000 124,950
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(b)
Retained profits is profit which has been kept in the company. It belongs to the shareholders, but is represented by assets in the balance sheet and is not a bank balance available to rebuild the garage forecourt.
Gearing ratio Without having information on the companys revenue reserves (retained profit and general reserve), the gearing ratio is currently: Loan capital Share capital = 20,000,000 25,000,000 = 0.8:1 or 80%
17.7
(a)
SRIAN PLC PROFIT AND LOSS APPROPRIATION ACCOUNT FOR THE YEAR ENDED 31 MAY 2003 Net profit before taxation Less corporation tax Profit for year after taxation Less ordinary dividends paid proposed 800,000 1,300,000 2,100,000 4,600,000 Less transfer to general reserve Retained profit for year * Draft profit Less: directors fees debenture interest Net profit 12,000,000 1,500,000 1,200,000 9,300,000 1,000,000 3,600,000 *9,300,000 2,600,000 6,700,000
This is already a high gearing ratio which investors will not wish to see going above 1:1 or 100%. If ordinary shares are issued to raise the money for expansion, the gearing ratio (including share premium account) becomes: 20,000,000 = 55,000,000* 0.36:1 or 36%
* ordinary shares 25,000,000 + 20,000,000 and share premium account 10,000,000 This is a much improved gearing ratio. If debentures are issued, the gearing ratio becomes: 50,000,000* 25,000,000 = 2:1 or 200%
* 6% debentures 20,000,000 + 30,000,000 This is an extremely high gearing ratio, well above the normal maximum of 1:1 or 100% acceptable to investors. It may be that Srian plc will have difficulty in meeting the annual interest costs of this option.
Conclusion It seems to be preferable for Srian to finance its expansion scheme with an issue of ordinary shares. This has a much lower gearing ratio than the issue of debentures the company may have difficulty in the future meeting the extra annual interest cost of 1,800,000.
(b)
Issue of ordinary shares ordinary shares are not normally repayable, so the company will have the finance for the foreseeable future the new shareholders will have voting rights not essential to pay dividends every year, although a failure to do so might cause difficulties with future share issues the power of the existing shareholders will be diluted because there will be more shares in issue the companys gearing ratio will be improved 17.9 (a) STOULBY LIMITED PROFIT AND LOSS APPROPRIATION ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2006 Net profit before taxation Less corporation tax Profit for year after taxation Less ordinary dividends paid proposed 63,000 *100,000 163,000 332,000 Less transfer to general reserve Retained profit for year Add balance of retained profits (profit and loss account) at beginning of year Balance of retained profits at end of year * 4,000,000 ordinary shares x 2.5 pence per share 120,000 212,000 410,000 622,000 650,000 155,000 495,000
Issue of debentures a different type of financing based on loans and interest, rather than shares and dividends the interest charge will rise by 1,800,000 from 1,200,000 to 3,000,000 interest must be paid whether or not profits are made a failure to pay interest could lead the company into insolvency no voting rights, so no dilution of shareholders power debentures must be repaid at an agreed date in future interest rate is fixed, whatever may happen to the level of interest rates debenture holders likely to require security for their loan in the form of a mortgage over company assets; this may restrict the use the company can make of the assets if repayment not made at due date, debenture holders can realise assets to obtain repayment the companys gearing ratio will be worsened
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(b)
SHARE CAPITAL AND RESERVES AT 31 DECEMBER 2006 Issued Share capital 4,000,000 ordinary shares of 50p each Capital Reserve Share premium account Revenue Reserves General reserve Profit and loss account *420,000 622,000 1,042,000 SHAREHOLDERS FUNDS * 300,000 + 120,000 transfer 3,542,000 500,000 2,000,000
(b)
DAVID MARK LIMITED SUMMARISED BALANCE SHEET AS AT 31 DECEMBER 2002 700,000 85,000 60,000 167,000 312,000
Fixed Assets Current Assets Stock Debtors Bank balance Less Current Liabilities Trade creditors Proposed dividends 37,000 *39,000 76,000 Net Current Assets or Working Capital NET ASSETS FINANCED BY Ordinary shares 8% Preference shares Share premium account General reserve Profit and loss account SHAREHOLDERS FUNDS * 35,000 + 4,000 (c) Limited company, or Private Limited Company
236,000 936,000
(c)
Revenue reserves are profits from trading activities which have been retained in the company to help build the company for the future.
350,000 100,000 50,000 120,000 316,000 936,000
(d)
Profit and loss account or general reserve
(e)
Revenue reserves can be used to fund dividend payments or to provide bonus shares to shareholders.
(d) 17.10 (a) Retained profit for year as per draft final accounts Less transfer to general reserve Less ordinary dividend Less preference dividend Corrected retained profit for year 150,000 45,000 35,000 4,000 66,000
The term Ltd means that the shareholders of David Mark Limited have limited liability. This means that they could lose their investment but cannot be asked to contribute further in the case of liquidation (unless the shares are not fully paid). Thus the risk taken by shareholders is limited.
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CHAPTER 18 Ratio analysis 18.3 (a) (b) (c) (d) (e) (f) (g) (h) (i) Exton gross profit margin 13.4% gross profit mark-up 15.5% overheads in relation to revenue 12.0% net profit margin (profit in relation to revenue) 1.4% rate of inventory turnover 33 days or 10.9 times per year net current asset (current) ratio 1.3:1 liquid capital (acid test) ratio 0.05:1 trade receivable days 1 day* return on capital employed 11% Frimley 44.0% 78.7% 39.8% 4.2% 95 days or 3.8 times per year 2.4:1 1.3:1 60 days 8.1%
profit This is a calculated figure which shows the surplus of income over expenditure for the year. It takes note of adjustments for accruals and prepayments and non-cash items such as depreciation and provision for doubtful receivables. (d) return on capital employed Net profit Capital employed* x 100 1
* limited companies: ordinary share capital + reserves + preference share capital + loan capital sole traders: the amount of the owners capital in the business Return on capital employed (ROCE) expresses the profit of a business in relation to the amount of capital in the business by the owner. gearing Debt (loan capital + preference shares, if any) Equity (ordinary shares + reserves) Gearing is concerned with the long-term financial stability of a business. It measures how much of the business is financed by debt (including preference shares) against capital gearing is often referred to as the debt/equity ratio. The higher the gearing, the less secure will be the ordinary share capital of the business and, therefore, the future of the business. This is because debt is costly in terms of interest payments. In general terms, investors and lenders would not wish to see debt exceeding equity; thus a gearing ratio of greater than 1:1 is undesirable. 18.6 (a) Trade receivables x 365 days Revenues Trade payables Purchases x 365 days
* revenue figure used for this calculation; this is unrealistic because most supermarket sales will be for cash rather than on credit Exton is the supermarket; Frimley is the engineering company Reasons: Exton Frimley low overheads/revenue and net profit margin; high inventory turnover; quick trade receivable days, low net current asset and liquid capital ratios; few trade receivables higher overheads/revenue and net profit margin and low inventory turnover; slow trade receivable days; good net current asset and liquid capital ratios; high figures for non-current assets and trade receivables
18.4
(a)
gross profit margin Gross profit Revenue x 100 1 (b)
This ratio expresses, as a percentage, the gross profit in relation to revenue. gross profit mark-up Gross profit Cost of sales x 100 1
(c)
trade receivable days
20-1 43,000 x 365 days 680,000 = 23.08 days
20-2 32,550 x 365 days 660,000 = 18 days 20-2 38,500 x 365 days 540,000 = 26.02 days
This ratio expresses, as a percentage, the gross profit in relation to cost of sales; often used by businesses to establish selling price. (b) net current assets Current assets Current liabilities Net current assets or working capital, are needed by all businesses in order to finance day-to-day trading activities. Sufficient net current assets enable a business to hold adequate inventories, allow a measure of credit to its customers (trade receivables) and to pay its suppliers (trade payables) as payments fall due. liquid capital (Current assets Inventories) Current liabilities Liquid capital is calculated in the same way as net current assets, except that inventories are omitted. This is because inventories are the most illiquid current asset. Liquid capital provides a direct comparison between the short-term assets of trade receivables and cash and short-term liabilities. (c) cash This is the actual amount of money held in the bank or as cash.
(d)
trade payable days
20-1 28,500 x 365 days 520,000 = 20 days
(e)
20-1 Trade payables are paid more quickly than trade receivables are paying, which will cause cash management problems. 20-2 Trade payables are paid more slowly than trade receivables are paying, which aids cash management.
Note: The figure for trade receivables has fallen during the period, while the figure for trade payables has increased. The reasons for the changes need to be investigated to include: has sales revenue reduced, or is collection from trade receivables more efficient? does the company have the money to pay trade payables, or have generous credit terms been offered by a supplier?
31
18.7
(a)
Net current assets (current) ratio Liquid capital (acid test) ratio Net profit margin (profit in relation to revenue) Rate of inventory turnover
= = = = or
Current assets Current liabilities (Current assets inventories) Current liabilities Net profit Revenue x 100 1
Proposal 2 30,000 **540,000 x 100 1 = 5.56%
** 380,000 equity (ordinary shares + capital and revenue reserves) 160,000 long-term bank loan Tutorial note: bank overdraft is a current liability and is not included in the figure of capital employed.
Average inventories x 365 days Cost of sales Cost of sales Average inventories Net profit Capital employed = number of times per year (c) x 100 1
Return on capital employed
Report To: From: Date: Subject: Proposal 1 This proposal to issue more ordinary shares means that ownership of the company will be diluted. Unless the amount paid out by the company in dividends is increased, then your dividend per share will fall. Return on capital employed will be reduced from 7.89% (30,000 380,000) to 5%. The companys gearing ratio is lowered (because equity has increased from 380,000 to 600,000); no interest to pay on the share issue. Reserves will increase to 300,000, ie 160,000 share premium and 140,000 retained earnings. the company may decide to make a bonus issue of shares in the future. Ordinary shareholder Student Accountant Today Proposals to raise finance
(b)
Green Ltd is the supermarket, while Hawke Ltd is the furniture store. Green Ltd has a low net profit margin and a high inventory turnover. This is a characteristic of the way in which supermarkets operate low profit margins, but a high level of revenue. Liquidity ratios are lower than the norms as supermarkets usually have few trade receivables. Hawke Ltd has a higher net profit margin with a lower inventory turnover. This indicates a business that sells higher value items which are not purchased on a regular basis. The liquidity ratios are close to the norms indicating a business with higher inventories and trade receivables than a supermarket.
(c)
If inventory turnover could be increased above 20 times per year, this would generate more cash and improve the liquidity ratios of the business (provided that selling prices do not have to be cut to encourage sales). If expenses could be reduced, the net profit margin would improve, and also return on capital employed. A review of buying prices and selling prices may reveal opportunities for increasing profits and return on capital employed. Advertising could increase sales, but only if the extra revenue generated covers the cost of advertising. Inventory levels could be reduced, so improving the net current asset ratio. Any surplus non-current assets could be sold to improve liquidity ratios.
Proposal 2 The proposal is to fund the expansion entirely from external borrowing your ownership of the company will not be diluted. Your dividend per share should remain the same and, if profits are increased after paying interest on the loans, will increase. The companys gearing ratio is increased by the borrowing, and the company must pay interest on the borrowing. The overdraft is a current liability which will have the effect of reducing the companys net current asset (current) ratio and liquid capital (acid test) ratio. Return on capital employed will be reduced from 7.89% to 5.56% (a smaller reduction than proposal 1). The company will need a repayment scheme for the external borrowing this could cause liquidity and cash flow problems in the future.
18.10
(a)
Formula Return on capital employed = Net profit Capital employed x 100 1
(b)
Ratio calculation Proposal 1 30,000 *600,000 * x 100 1 = 5%
300,000 ordinary shares (200,000 + 100,000) 160,000 share premium (140,000 + 120,000) 140,000 retained earnings
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18.11
(a) FALCON LIMITED BALANCE SHEET AS AT 31 MARCH 2007 Non-Current Assets Premises Fixtures and fittings Net book value 200,000 17,500 217,500
(b)
Gearing ratio =
Debt (loan capital + preference shares, if any) Equity (ordinary shares + reserves) = 37.42%
or
Debt Equity
Before adjustments = 28,000 *74,832 * 50,000 + 19,832 + 5,000
After adjustments Current Assets Inventories Trade receivables Cash and cash equivalents 14,560 5,456 31,058 51,074 (c) Current Liabilities Trade payables Tax liabilities Net Current Assets Non-Current Liabilities Debentures (2011-2013) NET ASSETS EQUITY Issued Share Capital 75,000 ordinary shares of 1 each Capital Reserves Share premium account Revaluation reserve Revenue Reserve Retained earnings TOTAL EQUITY 19,832 224,832 Tutorial notes: bank 1,058 + 30,000 (25,000 + 5,000 premium) rights issue = 31,058 share premium 5,000 + 5,000 premium on rights issue = 10,000 revaluation reserve 200,000 revaluation 80,000 net book value = 120,000 10,000 120,000 130,000 (b) 75,000 18.12 (a) (28,000) 224,832 (7,842) (7,900) (15,742) 35,332 252,832
28,000 *224,832
= 12.45%
* total equity from balance sheet
The rights issue has added 30,000 (25,000 + 5,000 premium) to total equity. Revaluation of the premises has added 120,000 (200,000 80,000) to total equity. The level of debt has remained at 28,000. The impact of the rights issue and the revaluation of the premises has been to reduce considerably the gearing ratio from 37.42% to 12.45%. Even before the adjustments, the company was relatively low-geared; the ratio is much lower after the adjustments. A lower gearing ratio reduces the level of risk to the company and enables it to borrow further funds in the future if required.
profit is a calculated figure which shows the surplus of income over expenditure for the year. cash is the actual amount of money held in the bank or as cash
Example of how a business can make a good profit during a year when the bank balance reduces or the bank overdraft increases (the question asks for two examples): purchase of non-current assets cash decreases; no effect on profit (but there is likely to be an amount for provision for depreciation in the income statement repayment of a loan cash decreases; no effect on profit payment of drawings/dividends cash decreases; no effect on profit an increase in trade receivables cash decreases; no effect on profit a decrease in trade payables cash decreases; no effect on profit an increase in inventory cash decreases; profit increases
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CHAPTER 19 Budgeting and budgetary control 19.1 (a) Benefits of budgetary control planning by formalising objectives through a budget, a business can ensure that its plans are achievable communication because a budget is agreed by the business, all the relevant managers and staff will be working towards the same end co-ordination when a budget is being set, any anticipated problems should be resolved decision-making by planning ahead through budgets, a business can make decisions on how much output can be achieved monitoring management is able to monitor and compare the actual results against the budget
19.3
(a) Sunshine Ltd Cash budget for four months ending 31 October 2002 July 000 Sales cash 1 month 2 months 5.2 12.0 3.2 20.4 Purchases 16.0 8.0 24.0 Net inflow/outflow Opening balance (3.6) (7.2) (10.8) Aug 000 5.6 15.6 4.0 25.2 18.0 8.0 26.0 (0.8) (10.8) (11.6) Sept 000 4.8 16.8 5.2 26.8 14.0 8.0 22.0 4.8 (11.6) (6.8) Oct 000 4.0 14.4 5.6 24.0 12.0 4.0 16.0 8.0 (6.8) 1.2
control action can be taken to modify the operation of the business Overheads motivation a budget can be part of the techniques for motivating managers and other staff to achieve the objectives of the business
(b)
Any three budgets purchases budget sales budget production budget labour budget debtor budget creditor budget cash budget
Closing balance
(b)
(i)
At 31 October 2002, the bank balance is budgeted to be 1,200. Thus, over the four-month period there is expected to be a change from an overdraft of 7,200 at the start, through a maximum overdraft of 11,600 in August, to 1,200 money in the bank at the end of October. The company sells beach buckets and spades, so the seasonal effect is over quickly. Expected amounts due from debtors in November are: 12,000 4,800 16,800
The most likely three budgets for a small business such as Classic Furniture would be cash, sales and production
1 month 20,000 x 60% 2 months 24,000 x 20%
(c)
Relevant factors when implementing budgetary control costs and benefits benefits must exceed the cost accuracy of information used demotivation of staff may occur if they have not been involved in planning the budget and/or where budgets are set at too high a level disfunctional management ensure that the budgets co-ordinate set too easy ensure that budgets are set at realistic levels to enable the business to use its resources to best advantage (ii)
It is likely that the company will go into overdraft again quite quickly, from November onwards.
The company needs to make arrangements for an overdraft facility for July, August and September, with a limit of approximately 12,000. Other measures to improve the companys cash position include: offering discounts to encourage increased sales allowing one months credit only, so receiving payment from sales quicker encouraging cash sales reducing purchases as the summer season draws to a close reducing overheads
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19.5
(a) July Income Cash from debtors 20,000 24,000 28,500 32,500 38,500 *47,760 August September October November December
Explanation receipts from debtors and payments to creditors are likely to occur some weeks after the sales and purchases have been recorded in the trading account the purchase of fixed assets affects cash but has no effect on profit repayment of loans affects cash but has no effect on profits
Hawk Limited 20% of cash from sales is received in the month of sale; then 60% is paid in the next month, with 20% two months after sale the sales of 60,000 forecast to be made in December are higher than each of October and November; the cash received from Decembers sales will be 11,760 in December, 24,000 in January and 12,000 in February thus, at the end of December, 36,000 is outstanding in December, the company plans to buy new fixed assets at a cost of 19,510 in December, the company plans to make a repayment on the loan of 20,000
Expenditure Payments to creditors Operating expenses Purchase of fixed assets Repayment of loan 22,000 31,500 26,000 30,000 36,500 10,000 12,000 11,000 12,000 8,500 14,000 12,000 18,000 12,000 24,500 12,000 12,500 12,000 19,510 20,000 64,010 (d) Net cash flow Opening balance Closing balance (2,000) 980 (1,020) (7,500) (1,020) (8,520) 2,500 (8,520) (6,020) 2,500 (6,020) (3,520) 2,000 (3,520) (1,520) (16,250) (1,520) (17,770) 19.7 cash from December sales: 60,000 x 20% x 98% cash from November sales: 50,000 x 60% cash from October sales: 30,000 x 20% = = = 11,760 30,000 6,000 47,760 (a)
See Chaper 20. Automatic updating as amendments are made, the entire budget is changed easily. What-if calculations the effect of possible changes can be considered, eg a reduction in the period of credit allowed to customers.
JIM SMITH CASH BUDGET FOR THE SIX MONTHS ENDING 30 JUNE 20... Jan Feb Mar Apr May Jun
(b)
980 (opening balance 1 July) + 17,770 overdraft (closing balance 31 December) = 18,750 total net cash outflow
Receipts Capital introduced Debtors Total receipts for month 10,000 10,000 1,250 1,250 3,000 3,000 4,000 4,000 4,000 4,000 4,500 4,500
(c) Memorandum To: From: Date: Subject: Reasons a company can make a profit but have a bank overdraft for a number of reasons, including: the application of the realisation concept timing of receipts and payments purchase of fixed assets repayment of loans The Directors of Hawk Limited Student Accountant Today Making profits whilst having a bank overdraft
Payments Van Creditors Expenses Total payments for month Net cash flow Add bank balance (overdraft) at beginning of month Bank balance (overdraft) at end of month 6,000 750 6,750 3,250 4,500 600 5,100 (3,850) 3,250 4,500 600 5,100 (2,100) (600) 3,500 650 4,150 (150) (2,700) 3,500 650 4,150 (150) (2,850) 3,500 700 4,200 300 (3,000)
3,250
(600)
(2,700)
(2,850)
(3,000)
(2,700)
35
Notes: no depreciation a non-cash expense is shown in the cash budget customers pay one month after sale, ie debtors from January settle in February suppliers are paid one month after purchase, ie creditors from January are paid in February (b) The cash budget shows the maximum bank overdraft to be 3,000 in May. Jim Smith could avoid the need for a bank overdraft in one or more of the following ways (the question asks for two ways): by commencing his business with a higher initial capital, eg 13,000 by buying the van on hire purchase or leasing instead of outright purchase by reducing his purchases to 3,000 for each of January and February by asking his suppliers for two months credit for the initial purchases of 4,500 made in January by asking his customers to pay more quickly
CHAPTER 20 The impact of computer technology in accounting 20.6 Two from each of: (a) (b) (c) single entry system which automatically makes entries in all relevant accounts accounts are normally already set up in the system all arithmetic in account entries is performed automatically provided that the original figure entered is correct, all account entries will be correct all calculations are automatic and therefore accurate error of omission (entries which have been left out in error) error of original entry (the wrong figure entered in error) error of principle (entry in the wrong type of account) mispost (entry in the wrong persons account)
36

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CHAPTER 2 Double-entry book-keeping: first principles

Capital Account 20-1 1 Feb Bank

Dr 20-1 6 Feb Bank

Computer Account 2,000 20-1

Commission Income Account 20-1 20 Feb Bank

Van Account 20-1 6,000

Cr 2,500 130,000 3,000 1,500 250 Cr Bank 75,000 Cr

Dr 20-5 1 Aug 15 Aug 20 Aug 25 Aug

Capital S Orton: loan Office fittings Commission received

Computer Rent paid Office fittings S Orton: loan

Cr 1,800 100 2,000 150

Capital Account 20-7 1 Nov

Capital Account 20-5 1 Aug

Dr 20-7 3 Nov Dr Bank

Photocopier Account 2,500 20-7

Bank Loan Account 20-7 7 Nov Bank

Computer Account 20-5 1,800

Office Premises Account 130,000 20-7

Rates Account 3,000 20-7

Office Fittings Account 1,500 20-7 25 Nov Bank

Cash Account 20-5 200 17 Aug

Cash Account 300 20-7 18 Nov 23 Nov Drawings Bank

Office Fittings Account 20-5 2,000 20 Aug Bank

125 100 Cr 300 200 Cr

Commission Income Account 20-7 15 Nov 28 Nov Cash Bank

Sally Orton: Loan Account 20-5 150 15 Aug Bank

Cr 1,000 Dr 20-7 18 Nov Dr 20-7 20 Nov Bank 125

Drawings Account 20-7 Cash

Drawings Account 20-5 100

Wages Account 250 20-7

Wages Account 20-2 375

Dr 20-2 2 Apr 4 Apr

Wyvern Producers Ltd A Larsen

Purchases Account 20-2 200 250

Dr 20-2 9 Apr 20 Apr

Purchases returns Bank

Wyvern Producers Ltd 20-2 50 2 Apr Purchases 150

A Larsen 20-2 4 Apr

Capital Sales Sales K Smithson: loan Sales Sales

Purchases Purchases Purchases Delivery van Wages

Sales Account 20-2 5 Apr 7 Apr 12 Apr 28 Apr

Pershore Patisserie Bank Bank Cash

Cr 150 175 110 100

Pershore Patisserie 20-2 150 15 Apr Sales returns 22 Apr Bank

Dr 20-2 2 Oct 6 Oct 14 Oct Dr 20-2

Bank Bank Bank

Dr 20-2 7 Apr 12 Apr 22 Apr

Sales Sales Pershore Patisserie

Bank Account 20-2 175 20 Apr 110 30 Apr 125

Wyvern Producers Ltd Amery Scales Ltd

Bank Bank Bank Bank

Cr 150 125 155 110

Sales Returns Account 20-2 25

Amery Scales Ltd

Weighing Machine Account 20-2 250

Mercia Knitwear Ltd 20-3 80 7 Jun Purchases

Amery Scales Ltd 20-2 250 17 Apr Weighing machine

Cash Account 20-2 100 29 Apr

Wages Account 20-2 90

Wyvern Trade Supplies

Sales Returns Account 20-3 50